5 fiscal-cliff effects on your wallet

What ‘going over’ could mean for gas, groceries and other consumer goods.

By

KelliB. Grant

As Congress continues working toward a deal that could avoid the fiscal cliff, consumers may want to consider what going over it could mean for their wallets.

The most talked-about impact, naturally, would be higher tax rates. (This fall, we estimated that taxpayers in the bottom quintile would see their bill increase by $412; the middle class, by $1,984. Read “What a fiscal-cliff plunge would cost you.”) But experts say the cliff’s broad budget cuts affecting nearly all government agencies would have a trickle-down effect that would hit consumers in less expected ways in 2013 and beyond—some involving price hikes, others decreases. “There is a dizzying variety of things the government pays for,” says Jack Plunkett, chief executive of consulting firm Plunkett Research.

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Of course, there is a lot up in the air. It is up to individual government agencies and programs to decide where cuts will be made, and several administrators have made public statements pledging to eliminate the fat before turning to cuts that affect their obligations to the public. The fiscal cliff hasn’t exactly caught them unawares, either. Budget cuts have been a recurring theme since 2008, and the looming cliff prompted many to spend cautiously and prepare contingency plans this year, says Plunkett. Plus, most expect some resolution will be in place before it comes time for them to take action.

That said, here are five possible scenarios for consumers if we do take the plunge.

Cheaper gasoline

Falling off the fiscal cliff “would deliver a pretty big hammer-size hit to crude prices,” says Tom Kloza, chief oil analyst for the Oil Price Information Service. After all, when budgets are tight--as they are likely to be with higher taxes and other cliff-related changes--people tend to stay closer to home and drive less. Crude futures are currently at roughly $90 per barrel, and could drop $20 to $30 by some analysts’ estimates--putting pump prices for gasoline closer to $2 per gallon. (The national average for a gallon of regular unleaded is $3.28, according to AAA.) Kloza says falling prices aren’t really a silver lining, however. “It is a little like trying to catch the flu so you can drop 20 pounds,” he says. “There are better ways to go about it.”

How the Fiscal Cliff Will Impact Consumers

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U.S. consumers may take a hit to the wallet if fiscal-cliff negotiations fail. MarketWatch senior consumer reporter Kelli Grant discusses what to expect. Photo: AP.

Longer airport waits

Travelers may spend more time at the airport, due to a combination of cost-cutting measures. Budget cuts to the Transportation Security Administration could affect staffing, curtailing the number of lines open at an airline checkpoint, says Ed Perkins, contributing editor for SmarterTravel.com. “Already they’re a choke point at some airports,” he says. “People have to wait 20, 30, 40 minutes in line for what amounts to no more than a one minute face-to-face interaction.” On top of that, more flights could be delayed if budget cuts to the Federal Aviation Administration delay much-needed control system updates and cut staffing. The agency could ask airlines to mitigate the situation by operating fewer flights, says Perkins, but that creates its own chain of problems: more competition for fewer seats will likely lead to higher fares.

John Pistole, chief of the Transportation Security Administration, has said the agency plans to keep frontline operations--such as airport screening--in place by making cuts in other areas. In an internal Department of Transportation email obtained by Bloomberg earlier this month, deputy secretary John Porcari wrote that immediate furloughs or layoffs were not expected.

Pricier groceries

Because Congress has been tied up with fiscal-cliff negotiations, it has yet to pass a new farm bill. Without one, policies revert on Jan. 1 back to the Agriculture Act of 1949. Among other effects, that would recalibrate how milk is priced, which could more than double the price from its current $3.54 per gallon. It could also reinstate planting quotas for other crops and limit disaster relief promised to farmers after summer droughts, thus raising market prices. If the USDA’s fiscal-cliff budget cuts affect staffing, meat prices could also increase--agency Food Safety Inspection Service inspectors are required to be present when slaughterhouses and other meat processing facilities are in operation, so with fewer inspectors, the supply could dwindle. All of those potential price increases would spill over into processed products that use those ingredients, says Teri Gault, founder of savings site TheGroceryGame.com.

Bigger retail discounts

Falling consumer confidence would nudge retailers to offer more enticing sales and discounts to get shoppers in stores. Worries about the fiscal cliff already contributed to dismal holiday sales, says Randy Allen, associate dean at Cornell University’s Johnson Graduate School of Management. (According to MasterCard’s SpendingPulse, sales were up just 0.7% for the period between Oct. 28 and Dec. 24.) “You’re going to see a lot of continued aggressive pricing now until they clear their winter inventory,” Allen says. That’s likely to continue if fiscal-cliff tax increases affect shoppers’ budgets and confidence, prompting them to reassess discretionary purchases. Of course, that would also mean many Americans don’t have the cash to take advantage even of bargain prices, she says.

Riskier foods and drugs

Due to previous budget cuts, Food and Drug Administration inspectors are already covering more duties and have less time per inspection, says John Spink, associate director of the Anti-Counterfeiting and Product Protection Program at Michigan State University. Fiscal-cliff cuts could limit the agency’s ability to effectively counteract emerging threats. One of note: food fraud, which experts define as the adulteration, dilution or mislabeling of goods. Olive oil, for example, may be merely a bad deal if it isn’t the high-end version the label claims—but it could present a dangerous health risk if criminals sub in a different kind of oil not meant for consumption. (Read “8 food frauds on your shopping list.”)

Tough U.S. laws have kept out many such products, but Spink and other experts say their prevalence is rising as wrongdoers figure out ways to get around widening inspection gaps. (Earlier this fall, Michael Taylor, deputy commissioner for foods at the FDA, told Food Safety News that sequestrations would be “a huge blow to our progress on food safety.”)

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